Update 3 (June 10): Palminfocenter discusses this post. Thanks Kris Keilhack. He calls it thought provoking. The other comments you must read.
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This is a follow-on to my “Could Apple mess up again with the iPod” post from last week. As I said last week, the real challenge will come from Microsoft. I think MS will model its strategy after its successful Pocket PC campaign.

Pocket Pc Wins the War

Let us first look at Microsoft brilliantly outflanked Palm to the extent that Palm capitulated entirely and released a Treo with a Windows Mobile OS. Interestingly, as I pointed out last week, Palm did use the much-talked-about license-your-OS strategy advocated by Clayton Christensen. It licensed the OS to several partners (Sony, Garmin, Tapwave, Handspring, Handera…) and for some time it did seem like the Palm was winning the battle.

Microsoft, meanwhile, made quite a few attempts (remember the brick-sized clamshell Jornada with a full-keyboard, anyone?) and finally hit a home run with the Compaq iPaq which used a similar stylus-based UI pioneered by Palm. iPaq was introduced in 2000, a full four years after the Palm Pilot debuted in 1996.

In the interim, MS has also done another important thing which will help it in the year 2002, as we will see – it built the OS as a general purpose one capable of running on multiple types of processors including the more powerful Intel ARM-based XScale processors. From the beginning Palm OS was running on 33MHz Dragonball processors and it persisted with that architecture by saying that it was focusing on simplicity. Palm released the Palm OS 5 capable of running on more powerful processors only in June 2002. Interestingly, Palm actually boasted in Feb 1999 at the release of the chic Palm V with the following : “The sleek, modern Palm™ V handheld redefines the handheld industry with a new icon…a product that strategically had zero additional features from its predecessor. Message: style matters.” [emphasis added by me].

In my opinion, the real inflection point for Pocket PC came with 2 near simultaneous events – FedEx and UPS, both deciding to use PocketPC for their next generation handheld devices for their field force – a very key application for both companies. At that time, when I heard about this, it intrigued me that they did not chose Palm. But i was not armed with the hindsight that I have now. Remember, both these projects were worth $100MM or above. So this was a very big deal for PocketPC.

Palm had reached a milestone of 10,000 applications for its platform by May 2001. But one wonders how many of them are mission-critical ones of the type Fedex and UPS deployed. By now, i think my drift must be clear – Microsoft cleverly spotted a big gap in Palm’s strategy – the enterprise. It leveraged its strengths to mount a challenge from the enterprise side, while Palm kept much of its focus on the consumer side.

MS had solid tools for developers like VC++ Embedded and VB Embedded building on their familiarity with these tools, chose a more powerful hardware platform which allowed developers to build richer applications. Palm meanwhile could not let go of its simplicity mantra and failed to detect the fact that the basis of competition had been shifted to the enterprise, where Palm could not win easily (we will see why later).

Even today, Palm is still focused on making cool devices like Treo, but clearly the platform war has been lost. It has gone from the category-killer to an also-ran. It is sad to see an icon like Palm suffer. But at this point, what do we learn from Palm’s experience? You can’t deny that the parallels with the Apple iPod are eery – iPod is also focused on simplicity, user experience etc.
Crossing the Firewall

For the technology product to be enduring, it must become a platform and for it to be a immensely successful platform it must straddle both the enterprise and consumer side (as MS DOS or MS Windows has done). Unfortunately, when it comes to technology products, it doesn’t appear that you can focus exclusively on the consumer or enterprise, because as we have seen, you leave the other open for competition to come in. For a platform to be built, we must understand how technology diffusion occurs.

For that, let us turn to Geoffrey Moore’s groundbreaking Crossing the Chasm technology adoption model. Moore brilliantly adapted Everett Roger’s innovation diffusion model by adding the concept of a chasm as seen in the diagram below. He theorized that the chasm must be crossed by companies that plan to move their products from the Early Adopters to the Early Majority – a key constituency that has to be penetrated for your product to be successful.

If the company is purely focused on the consumer market, the adoption proceeds further (perhaps without the chasm introduced by Moore) along the lines that Everett Rogers predicted. Additionally, the product reaches maturity and dies and gets replaced by newer products (contextual example will be Palm replacing the myriad electronic organizers like Casio BOSS that came before it). Let us look at Moore’s definition of the Early Majority: < Via Parker Hill>

The Early Majority are pragmatists… they care about the company they are buying from, the quality of the product they are buying, the infrastructure of supporting products and system interfaces, and the reliability of the service they are going to get…

Further Moore says (p42):

Fortune 2000 MIS Community, as a group, is largely pragmatist in orientation.

If you want an enduring technology platform, you need to be able to sell to this community because a platform not pervasive in the Fortune 2000 is not likely to be successful. My point is that, if you created a consumer product, such as the Palm or iPod, you use the consumers, in the innovators/early adopters space of Moore’s model above, as the testing ground to perfect your product and then tackle the Early Majority to enter the enterprise and be deployed within it. I decided to call this “Crossing the Firewall”, firewall symbolically standing for the boundary between the enterprise and the outer world. The techniques that Moore advocates for Crossing the Chasm are enlightening:

1. Target the point of attack – Target a specific market niche and focus all your resources on it.
2. Assemble an invasion force – by thinking through your customer’s problems and solutions in their entirety.
3. Define the battle – frame it in such a way you look differentiated from your competitor.
4. Launch the invasion – Use a direct sales force with a central consultative salesperson who works with the client in needs analysis and orchestrates an entire solution around your product for the client. Direct sales is the best channel for crossing the chasm.

The last point is telling. In the Palm Vs. PocketPC, it is Microsoft that has, having spent a long time selling to the Enterprise, a large direct sales force. Additionally, the sales force is complemented well by its consulting and ISV (Independent Software Vendor) partners, armed with Microsoft development tools and product knowledge.

Little wonder, Microsoft was able to capture FedEx and UPS to establish a major beachhead in the enterprise market. Since Palm was not paying that much attention to this market, it obviously did not (I think it will be true even today) have a enterprise-focused direct sales force, which is a crucial weapon in Crossing the Firewall.

How does the Apple iPod stack up
If you look at the Apple iPod, it clearly lacks the enterprise-focused consultative direct sales force to be able to help sell into the pragmatist Fortune 2000 MIS marketplace. What do pragmatists look for in new platforms (Via Gokubi):

Don’t require us to push them to their limits

Follow accepted standards

Support integration with other platforms

Are using current or forward-looking technology

Additionally, Gokubi says that the community around the platform should:

Show high levels of software development on the platform

Show popular use of the platform

Have viable businesses built around the platform, especially hosting services

Publish books and hold conferences on the platform

Built with software languages and subplatforms that are popular and viable

Suffice it to say, iPod has a long way to go in each of these except in the case of the Hardware platform, where it has hit a home run by creating an array of third party products. In contrast, Windows Media is well penetrated in the larger market, Windows Mobile is becoming more and more dominant in the Smartphone market.

Microsoft may make a play for the enterprise using Windows Mobile. As Podcasting gains further traction in the Enterprise market, CIOs may look to leverage their existing Smartphone deployments by adding Podcasting as an added feature. They may also use podcasting as a justification for additional Smartphone deployments. Its not likely that they are likely to invest in iPods for all their employees just to listen to podcasts.

In the Enterprise market, MP3 player is likely to be seen more as a compelling feature than a justification for an entire device. Even if the iPod were to be successfully sold to the Enterprise as a separate device, it would need the ability to manage the iPod as an enterprise asset complete with security, confidentiality protection etc. I rest my case. Notes &

References:
1. History has atleast one ominous example: AOL IM, a popular IM application with a huge installed base amongst consumers, is an example of a popular consumer product that didn’t cross the firewall and ended up ceding the space to others. Instead Microsoft with its Live Communication Server and IBM with its Lotus Sametime are set to dominate that space.

2. History has atleast one exception:Intuit’s Quicken is one consumer product that Microsoft tried very hard to beat but has not been able to succeed. Interestingly, Quicken being a consumer-only application, it did not need to cross the firewall. May be, that is the reason Microsoft has not able to beat Intuit’s Quicken. Its possible that Apple may have concluded that the iPod is only a consumer platform and that is sufficient to dominate the market.

Comments

Sukumar, I am a bit puzzled by your argument. I believe that a fundamental difference between Palm and iPod is that iPod is consumer centric and Palm is IT/business centric. So, as you have correctly observed, Microsoft through its sales force, strong presence in enterprise market and nice integration across their product stack (such as Exchange Server and Windows Mobile based devices) was able to replace Palm OS devices with Windows CE based devices.

iPod does not yet play in the enterprise market. So, is your point that Microsoft will preempt any such move by Apple into the enterprise market?

If so, I believe it is the other way around – Microsoft with its focus on the consumer electronics market will use its wherewithal and gumption and take iPod heads on, instead of coming via the enterprise market. This will certainly not be easy for Microsoft. One of the reasons iPod is popular is iTunes. Of course, UI is also another major reason. So, unless Microsoft can beat Apple in both these areas, they will have a tough time replacing iPod in the conusmer arena. But given their intentions to bolster their presence in the consumer electronics market, they will come hard at Apple. So, Apple should try and safeguard its turf, before pursuing the enterprise.

As you have mentioned, I do not see companies doling out iPod to just listen to music. However, apple can try and enter the enterprise/PDA market by doing the following –

1. Apple building an iPod-cell phone. There are rumors that this could already be happening.

2. Leverage the above to support PDA capabilities in their mobile phones and move into the enterprise. It will still be difficult considering that they do not have a base in the enterprise and have not opened up their APIs or licensed their technology yet.

Sidebar: I really like a single device serving as my phone, digital assistant and media player. I own a Nokia 6682 and I typically have about 50 songs and 5 podcasts saved in my memory card at any time. I am perfectly happy with the sound quality for the songs and considering the limited number of audio files, UI is not such as big issue. However, for folks who store 1000’s of songs, iPod will be the way to go, and I do not see an all-in-one device replacing the iPod (or any such dedicated music playing device).

Thanks for the comments. My whole point is that the Palm was seen primarily as a consumer device at first. As I pointed out in my post, Palm spent too much time focusing on that aspect. If they had any intentions of becoming a platform, they should have attempted to cross the chasm, which they didn’t. That is why Palm is now in the also ran status instead of being the owner of a popular platform franchise.

3 other things that you say, confirm my doubts –

a. the iPod cell phone – if it comes with PDA as well as iPod functionality with support for enterprises, then it will be good. But knowing Apple’s lack of focus on the Enterprise, they will most likely bring out a consumer cellphone widening the gap with Windows Mobile further.

b. the fact that you like the cellphone Nokia 6682 which does all 3 – media playing, phone and PDA well. I think enterprises are likely to go this route. As and when that happens, as the Windows Media format becomes popular in this space, as it is likely to be, MS will be then able to create a killer Windows Media store that can take on iTunes. Obviously, MS will hedge its bets and continue on its PMP (portable media player) strategy to keep trying to crack the consumer market.

c. Microsoft will have a tough time replacing the iPod in the consumer arena. Yes, that is why, I think it will try to attack the iPod from the enterprise where it is the weakest.

I hope Apple wakes up and makes a proper, coordinated move for the Enterprise.

IPOD is doomed using its current model. The only thing protecting IPOD at the moment is iTunes and the locked content that is being used.

As iPod becomes more pervasive, with iTunes accounting for a higher percentage of online music sales, its clear that within the next 3yrs, competition regulators will have to force Apple to open up its format. Most likely through a licensing scheme.

Regulators are already buzzing around what can be interpreted as anti-competitive behaviour. When that happens, the amalgamation of Smartphones, Cameras and Music player is the near future. At the moment, the Camera is closest to being replaced by the phone. Early cameras in phones were add-ons, so have never been very good. Now the phone camera is being taken more seriously and we’re quicly moving towards the phonecam which is as good as standalone cameras. Once 3 mega pixels or more sensors becomes standard in phones with the integration of newer, brighter low power led flashes and lens, most people will use their phones as their defacto camera.

With the music player, lest we all forget that most people have bought the Nano with its measily 1-2GB memory. How far are we really from an iMate Jam style device, with a 4MP camera with flash, running a music player with licensed iTunes API with 8GB expandable memory, with in built GPS, Wi-fi, GPRS, 3G.

To manage all these functions will require a platform, which people are familiar with like Windows Mobile. The iPod will lose out not by being taken on head on, it will lose out the way the digital camera is doing, by having its full functionality replicated as a standard add-on in a handheld device.

I think you are right. I had read somewhere that the average number of songs in an iPod is only 375 which is below what the basic Shuffle can carry. Therefore, iPod functionality being subsumed by the smartphone is a very probable scenario and as i said in the enterprise scenario that becomes even more probable. Iam sure people noticed the rumor that Apple may be tying up with Blackberry which will give it some legs in the Enterprise market.

This reinforces my thoughts on this topic – MS will take iPod head on in the consumer space instead of coming via the enterprise – ala XBox against Sony Playstation. MS has the gumption and cash power to do this. Versions 1 and 2 of the iPod rival will probably suck, but by version 3, MS would have ironed out the kinks and exposed the APIs to bring in developers and business partners into their fold. As Sukumar had mentioned before, the fact that Apple is NOT opening up their APIs may spell the death knell for iPod.

Eventually, I see MS bundling “iPod rival” in devices that support Windows Mobile OS. So, for example, folks who love the Treo 700w, would get “iPod rival” hardware bundled in, with a free 3 month subscription to MS music service – all of which will somehow be tied with Windows Live. Now, you have enticed folks to move away from iPod/iTunes!!

Hi Sukumar. Interesting analysis. Both companies, Palm & MS, have indeed followed different business models. They were targeting different target customers, which they tried to reach through different channels. However, I’m not sure that this analysis can be applied to the iPod.

Apple’s strength regarding iPod is the business model design. By linking a product (iPod) with a service (iTunes) to sell entertainment (listening to music everywhere), which is all based on an acknowledged capacity to design stylish things, they designed a business model that is hard to copy. The business model building blocks perfectly fit…

As mentioned above Apple’s main weakness will be their proprietary approach. To date it plays largely to their favour and only future will tell if it will be their Achilles’ heel…

thanks for the comments. You are right in the Apple has put a great business model together. However, my point is that, it is too consumer-focused thereby opening a window of opportunity for MS and other players to come in with an enterprise-focused business model. As i explained this is how Palm lost the battle to Pocket PC.